The UK government is rewarding companies that are innovating in science and technology. R&D is important for all businesses, as it drives improvements in products or processes, and it benefits the wider economy through scientific and technological advances. One of the ways they encourage innovation is through generous R&D Tax Credits.
Table of contents
| What are R&D Tax Credits? | Jump to section |
| How do R&D Tax Credits work? | Jump to section |
| How much are R&D Tax Credits worth? | Jump to section |
| R&D Tax Relief Rates | Jump to section |
| Can you claim R&D Tax Credits? | Jump to section |
| Can you claim R&D Tax Credits every year? | Jump to section |
| How to check your eligibility | Jump to section |
| Which costs qualify for R&D Tax Credits? | Jump to section |
| Examples of qualifying projects | Jump to section |
| Calculating R&D Tax Credits | Jump to section |
What are R&D Tax Credits?
R&D (Research & Development) Tax Credits are a generous incentive designed to reward companies that invest in R&D. These tax credits can reduce the company’s Corporation Tax liability or be payable as a lump sum.
R&D tax credits are one of the most generous government-backed tax reliefs, but many companies do not realise they qualify.
How do R&D Tax Credits work?
Do you pay technical people to solve technical problems, including the development of new or improved processes, products, or software? If so, your company may qualify for R&D tax credits.
R&D tax credits can be applied as either a cash payment or Corporation Tax reduction, and is proportional to the amount you have spent on R&D. The more you invest in R&D, the more valuable the tax incentive may be.
How much are R&D Tax Credits worth?
For an SME, R&D tax credits are worth around 21.5% of qualifying R&D spend. There are two main R&D tax relief schemes in place for UK companies. These are the SME scheme and the RDEC scheme.
R&D Tax Relief Rates
|
Scheme |
Which companies qualify? |
Benefit |
|
SME |
Companies with fewer than 500 employees, with either less than €100m turnover or a balance sheet total of less than €86m. |
Saving of around 21.5% of qualifying R&D costs. |
|
RDEC |
Companies which do not meet the SME scheme criteria. |
Net saving of 20% on qualifying R&D costs |
The rates listed above are current from 1 April 2023. For periods up to 31 March 2023, the previous rates still apply. This means an effective CT saving of 24.7% instead of 21.5% for SMES, as well as a 230% deduction of their qualifying R&D costs from their taxable profits (130% extra on top of standard 100% deduction from the profit and loss account. The maximum benefit for loss-making companies will also be 24.7%, not 18.6%. The previous RDEC rate of 13% (net 10.7%) will also apply, rather than the new higher rate of 20%.
Can you claim R&D Tax Credits?
A business may claim R&D tax credits if their innovative activities meet HMRC’s definition of R&D. This is actually much broader than it sounds, and a lot of innovative companies do not realise they qualify for a significant government-backed tax break.
In order to qualify for R&D Tax Credits, your project must align with the following:
- It must relate to your company trade (current or future)
- It must attempt to achieve an overall advance or appreciable improvement in science or technology
- It must attempt to overcome technological or scientific uncertainty
- The project must not have been easy to work out by a competent professional in the field
In order to claim, an organisation must be a Limited company that pays Corporation Tax.
Can a company claim R&D tax credits every financial year?
Yes, a company can claim R&D tax credits every financial year in the UK, provided they have carried out qualifying research and development activities during that year.
What if the R&D was not successful?
You may be concerned that the R&D project was not successful or didn’t yield the desired advance, but this does not impact on your eligibility for R&D tax credits. In order to qualify, your R&D only needs to attempt to achieve the advance in science or technology.
How far back can you claim R&D tax credits?
R&D tax credits are a relief from Corporation Tax, which allows you to make an amendment to any original tax return 2 years after the end of the accounting period. Example – A company with a 31 March 2022 year-end would have until 31 March 2024 to submit an R&D claim. That also means if the same company had R&D projects in the 31 March 2020 year-end, they have until 31 March 2022 to submit a claim before it goes out of time.
How long does it take for an R&D tax credit claim?
HMRC aim to process SME claims within 28 days – though it can sometimes be closer to 4-6 weeks after submission before any repayment or credit is issued. Roughly 95% of claims are processed within the 28 days though.
Can you check your eligibility for R&D Tax Credits?
It is easy to check your company’s eligibility for R&D tax credits – to do so, you will need to understand the details of the project, including what you did, when it was carried out, and whether it aimed to achieve an advance in science or technology.
The easiest way to check your eligibility is to download our free R&D Tax Credit Eligibility Checklist, or to speak to a qualified R&D tax adviser.
Which specific costs qualify for R&D tax credits?
R&D tax credit eligibility is often discussed in broad strokes, but what about specific examples of qualifying expenditures?
To be clear, not all costs related to an R&D project are eligible.
The bulk of the qualifying costs are usually staffing costs: a proportion of the salary, employers’ NI and employers’ pension contributions in respect of individuals who have worked on the R&D project.
SMEs may be able to claim 65% of the costs used for third-party subcontractor costs for qualifying activities – typically outsourcing of R&D testing or making specific components for a prototype as examples.
Where a company uses third-party labour provided through a staff agency or provider, you can claim 65% of those costs, restricted to the percentage of their time spent on R&D activity – these are known as externally provided workers.
Consumables – these are materials used up in the R&D process, such as building a prototype but also a percentage of energy costs of the company premises and software licence costs, are also all qualifying costs.
Examples of projects that qualify for R&D tax credits
- Electronics company manufacturing innovative display equipment.
- Software developers producing ground-breaking new software.
- Steel heat treatment companies automating and refining processes.
- Chemical manufacturers developing new compounds.
- Engineering companies developing high performance components.
- Animal feed manufacturer developing new health products.
How to calculate your R&D tax credits claim
In order to calculate the potential value of your R&D Tax Credit claim, you will need to know:
- Whether your company is an SME (does it have fewer than 500 employees and turnover of less than £100m?)
- Your total qualifying R&D expenditure
- The profit made in the same year as the R&D spend.
With this information, you can use an R&D tax credit calculator to find out how much relief you could receive.
Be aware, though, that no online calculator can substitute for proper advice. They are, however, very useful tools for highlighting the potential benefits.
